2024 was another bumper year for Wall Street, but the stock market ended with a bang rather than a bang.
S&P 500 on the verge of 2024 (^GSPC 1.26%) increased by 23.3%, the second consecutive year of at least a 20% increase. Something like this hasn’t happened since the 1990s, and the index managed to achieve this strong performance despite a slump in late December that began after the Federal Reserve scaled back its outlook for rate cuts in 2025. Ta.
In a year as strong as 2024, this year-end decline may have surprised some investors. In fact, Stock Traders Almanac founder Yale Hirsch has previously discovered that the stock market tends to rise at the end of the year, which he called the “Santa Claus rally.” Although the term is often used loosely to apply to year-end results, Hirsch places strict boundaries on the term, defining the relevant period as the last five business days of the first year and the first of the following year. Defined as 2 business days. Hirsch first observed this pattern in 1972 and also found a correlation between the market’s performance during the Santa Claus rally and its performance the following year.
The most recent Santa Claus period ended on January 3, and the stock price fell 0.5%. Here’s what this means for the market in 2025.
Image source: Getty Images.
The significance of the Santa Claus rally
From 1993 to 2023, Santa Claus Rally accurately predicted the direction of the S&P 500 in the following year 23 out of 31 times. Mr. Hirsch is so confident in the predictive power of this indicator that he coined the phrase “If Santa Claus fails to call, a bear might come to Broad and Wall” after the intersection where the New York Stock Exchange is located. was known for.
And although this indicator has gained enough popularity that it is often mentioned on Wall Street and in the financial media at the end of the year, there is no clear reason for the correlation.
That could be because individual investors become more active at the end of the year, or it could be that year-end rebalancing activity by managers is a predictor of next year’s performance. It may also reflect the general mood of individual investors and the size of year-end bonuses, some of which may be invested in the stock market.
Does Santa Claus miss the warning signs?
With a 74% hit rate over 30 years, the Santa Claus Rally has no hard and fast rules. Exactly one year ago, the S&P 500, as it is now known, ended 2024 up 23%, although the stock market was down 0.9% during the relevant period. Santa Claus was displayed incorrectly.
Similarly, many Wall Street analysts are relatively bearish on stocks in 2024, with market gains outpacing all Wall Street expectations since the beginning of the year.
For 2025, analysts are more bullish on the S&P 500’s consensus target of above 6,600, or an increase of more than 12%. They are betting on a continuation of the AI boom and more business-friendly policies from the Trump administration.
However, stock market valuations remain high. Tariffs, mass deportations and other policies from the new administration could also impact markets, not to mention the Fed’s expectation that interest rates will remain high for longer than expected.
After all, investors shouldn’t be selling their stocks just because Santa Claus didn’t have a rally. But it’s worth keeping the indicator’s predictive performance in mind when preparing your portfolio and expectations for a potentially volatile new year.
Jeremy Bowman has no position in any stocks mentioned. The Motley Fool has no position in any stocks mentioned. The Motley Fool has a disclosure policy.
